The Bursting Of The Treasury Bond Bubble Has Begun

I should begin by noting that I did make this proclamation before, and was wrong: in fact, last year I lost some money attempting to short long-dated US Treasury bonds (NYSEARCA:TLT). I will concede that shorting anything in an environment characterized by aggressively inflationary monetary policy, as evidenced by any money supply chart, is a dangerous idea; all that money has to go somewhere, and that somewhere could mean the bond market -- even if the bond market is ultimately offering negative returns.

But I feel the opportunity is here upon us again. First, I want to highlight the technical situation, which shows that TLT is now below the 200 day exponential moving average. If bulls do not defend the level highlighted, a move to 95 -- a fall of over 13% from where we currently are -- is very possible in light of what price is telling us about where buyers and sellers are situated in this market.

click to enlarge

If we zoom out to a monthly timeframe, we get an idea of some other price levels long-dated Treasury bonds could fall to if momentum picks up to the short side. A fall to 81, the lower level highlighted in the chart below, would constitute a decline of over 26% from where we currently are. Play that with a leveraged ETF like TBT, and over 50% returns become possible (although I only advise leveraged ETFs to those who are well-versed in technical analysis and are using carefully placed stop-loss orders to cap risk as well).

That's the technical situation. Here's a recap of the fundamentals:

1. US national debt is now coming in at over $15.5 trillion -- and counting. If you think that will ever get paid off with anything but drastically devalued dollars, I have some beachfront property in Kansas I'd like to sell you. Publicly acknowledged debt cancellation and restructuring is the only solution to preserving the current monetary system. As the world's monetary authorities don't have that anywhere near their agenda, I'm not counting on it happening. And so, the case for a panic out of bonds as this situation becomes more apparent remains viable.

2. Many pundits remain befuddled by the stock market's rise, and continue to call for a crash. Perhaps one will occur, though I'm anticipating US equities to primarily rise into 2014. The chart below plots TLT against SPY; we can see the spread is widening and capital is flowing into equities. I suspect this trend will continue, and that capital will ultimately flow out of bonds and into precious metals, stocks, and commodities.

The aggressive inflationary monetary policy of the past 11 years has fueled many bubbles and corresponding collapses; we've seen this pattern in internet stocks, real estate, uranium, rare earths, silver, wheat, and probably some others. But one area we haven't seen it is in Treasury bonds, and that is the asset I believe is most fundamentally overvalued for the simple reason that there is no way the US can ever pay off its debt (which is still growing). As such, I believe the capital flow out of Treasury bonds and into gold (NYSEARCA:GLD) will ultimately go down as one of the largest capital transfers in financial history.

Another key factor to observe here, and one that also strengthens the case for a continued decline in the bonds, is that the US dollar continues to show weakness. Below is a chart of (NYSEARCA:UUP), the ETF corresponding to the US dollar. You can see it has been in a downtrend since the start of the year, and that we are right at the 200 day exponential moving average, just like TLT.

I won't be shorting Treasury bonds at the moment, only because there are too many other opportunities I'm focused on. But I am shorting the dollar via the spot forex market, and I expect both Treasury bonds and the US dollar to continue sinking, and to surpass the all-time lows they reached in the first decade of this century.

Disclosure: I am long physical gold and short the US dollar in the spot forex market.

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